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Second Mortgage Foreclosure

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Updated: Sep 23, 2014

Highlights

  • Your second mortgage holder can foreclose on your home for non-payment.
  • Review why it is possible legally, although not practical economically, for a second mortgage holder to foreclose.
  • Consider the possible tax implications for any debt you have forgiven.
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It is possible legally, although not practical economically, for a second mortgagee to foreclose.

If you have a second mortgage which you are not able to pay, you can face foreclosure, whether or not you are paying your first mortgage in full and on time. While your second mortgage holder is in a weaker position, when it comes to collecting from the proceeds of a foreclosure sale, it does not mean that your second mortgage lender will accept non-payment without taking action. Just as with your first mortgage, you need to be concerned with the issues of recourse and non-recourse loans and a deficiency balance, when it comes to considering what kind of obligations you may have after a foreclosure.

The likelihood that your second mortgage holder will initiate a foreclosure depends on your property values and your lender’s ability to collect on a deficiency balance.

Property Values

Given today’s real estate market, where property values have dropped significantly in many areas, many homeowners are upside-down on their mortgages. If you are in a negative equity position, it may be possible legally, although not practical economically, for your second mortgage holder to foreclose and preserve its interests in the property. The first mortgage holder receives any money from a foreclosure before the second mortgage holder. If there is not enough equity in the home to pay off the first mortgage, the second mortgage holder gets nothing in the foreclosure sale.

When a second mortgage holder initiates the foreclosure process, it is responsible for paying off the first mortgage holder’s balance due. If the sale price of the property would not be enough to pay off the first mortgage balance and any property taxes, then the second mortgage holder would gain no economic benefit from foreclosing.

Deficiency Balance Collectibility

The ability of the second mortgage holder to collect on a deficiency balance depends on the legal remedies available and your financial position. In some states, such as California, and in some circumstances, your second mortgage may be a non-recourse loan. A non-recourse loan means that the lender has no legal ability to collect any deficiency balance that remains after your property is sold. Its only recourse is the security on the property itself. Most second loans are recourse loans, even in non-recourse states, although it may be a non-recourse loan if you took out the second mortgage and used the funds to purchase your home. If your loan is a non-recourse loan, the second mortgage holder will have no ability to collect on deficiency balance, which reduces the likelihood of the second mortgage holder foreclosing. You will need to review your loan documents and state laws to determine if your second mortgage is a non-recourse loan. Contact an attorney in your state who is experienced in property law to determine if your second mortgage is a recourse or non-recourse loan.

Your financial position is also important. As we discussed, a second mortgage holder is often reluctant to pursue foreclosure. However, if you have valuable assets or wages that can be garnished, your second mortgage holder will be likelier to aggressively pursue you, if it has the legal ability to do so. The more collectible the deficiency balance is, the greater the chance that your second mortgage holder will foreclose on you.

Quick Tip

Each state legislature created unique foreclosure and anti-deficiency laws. Follow the links just mentioned to learn the foreclosure rules relevant to you.

Possible Payment Solutions

Second mortgage holders often initially take a hard-line stance in negotiations with homeowners in default. You may find it best to liquidate an asset voluntarily, as opposed to facing a wage levy that could cause you great financial havoc.

However, if the lender is convinced that you have no ability to repay the second mortgage and are considering bankruptcy, the lender’s position will soften and consider a lump-sum settlement. Some second mortgagees will settle for 10 to 30 cents on the dollar, depending on the policies of the company.

If collection efforts ensue, negotiate with the creditor in an attempt to reach an out-of-court settlement on the debt. If necessary, enroll the debt in a debt negotiation program. You can to the Bills.com debt relief savings center for a no-cost quote. Another option is to negotiate the debt yourself.

Quick Tip

Debt distressing you? The Bills.com Debt Coach is a no-cost online tool that will analyze your debts and show you the options available to resolve them and the costs and benefits of each.

Summary

If you end up with a deficiency balance, make sure that you understand what kind of financial and tax responsibilities can follow you, even after you lose or sell your home. If your lender decides to write off the debt, that can create a tax debt for you. Speak with an attorney or a tax specialist, so an expert can explain things to you. The last thing you want is for a problem that you thought was behind you to rear its head with IRS collection notices or a wage levy from a judgment your creditor obtained.

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  • BJ
    Feb, 2014
    Bryan
    Have a 2nd property, I/O Mortgage, in NV. I'm a CA resident. Anticipating not being able to afford payments after the 10 yr mark, when loan adjusts and i'm no longer able to pay interest only. Ten years in, and no equity in property because it's severely worth less than purchase amt. Don't think Refi/Mod are plausible options. Don't want to declare BK, still have a job and a first on a property in CA, where my residence is. Best viable options?
    0 Votes

    • BA
      Feb, 2014
      Bill
      Start looking into a short sale or deed in lieu of foreclosure to rid yourself of your underwater property. Open a discussion with the mortgage servicer now about these two options. Also, look for a Nevada lawyer who has mortgage experience to help you with this process.
      0 Votes

  • KM
    Feb, 2014
    Kim
    Out of good deed, I cosign a friend for her to be able to get a house back in 2006. Few months after they refinance the house but I'm not sure if my name was taken out of the previous loan. After a year, I heard she had the house foreclosed. I went online and obtain my current credit history report and it shows that I have two mortgage loans. The first mortgage cleared my name and a 2nd loan is reflecting on the credit report which is greatly affecting my credit score. I know my mistake of cosigning someone and I've learned it in hard way. So, how can I deal with this and get it out of my credit report? I know that its over 7 years and I can ask the credit bureau to take it off my record. it's been almost 8 years and I'm worried if the 2nd loan will pursue me or not. What are my options?
    0 Votes

    • BA
      Feb, 2014
      Bill
      It sounds like you signed for two loans to help your friend buy the home. What you need to do is to find out the SOL for mortgage debt in the state where the home is situated. If the SOL has expired, don't pay a penny on the debt or make a promise to pay. I recommend that you check with a lawyer to find out the SOL for the mortgage debt.

      Separately, dispute the entry on your credit report. Whether you owe the debt or not, the account should fall off of your report after 7 years from the date of default, barring a judgment being entered against you.
      0 Votes

  • LD
    Nov, 2013
    Lori
    I purchased a home in 2006 with a first and second mortgage. Lost job and IndyMac bank foreclosed in 2009. I had not heard from any bank until yesterday when I received a letter from OCWEN saying they were collecting on my second mortgage and the amount they want is twice the second mortgage's balance. I received a 1099 for the second mortgage in 2009. I have once again lost my job and unemployed. What are my options?
    0 Votes

    • BA
      Dec, 2013
      Bill
      Before you do anything else, send Ocwen a written debt validation notice. A debt that cannot be validated cannot be collected. On a related note, I would be very curious to learn if there is any legally defensible justification for the interest and other fees someone added to your second mortgage balance.

      I assume the 1099 you mentioned is a 1099C, which is a notice to the IRS of a forgiven or canceled a debt of $600 or more. The 1099C notice, which the IRS calls a "Cancellation of Debt" notice, is perhaps the most misleadingly named document the IRS publishes. This notice does not remove a consumer's legal liability for the debt, or change the creditor's right to collect the debt on its own, or the creditor's right to sell the account to a collection agent. The 1099C notice requires the consumer to include the amount mentioned in the 1099C as income in their next income tax filing. See the Bills.com article Cancellation of Debt Income to learn how to handle a 1099C notice.

      What are your options? As mentioned, send Ocwen a debt validation notice. Second, learn your state's statute of limitations for mortgage-related debt. Start with the Bills.com Statute of Limitations on Debt page. Note that you may need to conduct some research to learn which statute of limitations applied for this type of debt. Some states use a special mortgage-debt rule, others rely on the promissory note rule, and others will use the contracts rule.

      Then, proceed accordingly. If Ocwen cannot validate the debt, then you will not hear from Ocwen again. If Ocwen validates the debt, then look to your state's statute of limitations rule for this type of debt. If the statute of limitations clock has run out on this debt, then send Ocwen a cease communications notice.

      If the statute of limitations clock has not expired, then you risk nothing by putting your cards on the table and talking to one of its collection agents, explaining you have no assets and no income. In many cases like this, the collection agent will give up and pursue more lucrative targets for collections.

      Ocwen may invite you to pay a small amount "in good faith." Think twice or three times before doing so, because making a payment resets the statute of limitations clock to zero. Resetting a statute of limitations clock would not be in your best interest.
      1 Votes

  • JF
    Oct, 2013
    Jon
    I purchased a home in California back in 2006 with no down and an 80/20 loan. Come 2008, I stopped making mortgage payments and after a few months I left the house. Its been 5 yrs since I left my home and informed thru free credit report that my first loan was charged off thru foreclosure, but my second loan still shows up on my credit report that keeps pulling my score down. I am not quite sure if my loan is a non recourse type of loan, but I think it may be. I never refinanced or took any equity out the home. My question is, how can I get the second mortgage out of my credit report?
    0 Votes

    • BA
      Oct, 2013
      Bill
      Under the Fair Credit Reporting Act (FCRA), the federal law that sets the rules consumer credit reporting agencies must follow, most derogatories can appear on your credit report for 7 years after the date of first delinquency. If your date of first delinquency was in, let's say May 2008 for the sake of argument, the derogatory account will be removed from your credit report in June 2015.
      0 Votes

  • MC
    Jan, 2013
    Michael
    Went through a divorce here in Texas during 2012 and my wife was awarded our house. Second mortgage she decided she would not pay and let the home's first mortgage go into foreclosure on the property. She was paying the 2nd and quit, saying that I was to pay the second which was secured by the house... I was unable to as I was unemployed at the time. Horrible rates and loan $400 a month with $16k owed on a $20k loan taken out in 1997. Suggestions for my plight here in TX/!
    0 Votes

    • BA
      Jan, 2013
      Bill
      I assume your ex-spouse's failure to stay current on the second concerns you because of the immediate impact on your credit report and score, and because as co-signer of the mortgages you have personal liability for the loan. I do not have good news for you. There is no "if we get divorced, the party occupying the home has 100% liability for the debt," clause in any mortgage loan I have read. A divorce has no impact on a joint loan, even if one party promises to assume the liability for the loan. There are four ways a joint borrower can end their liability for a loan:
      • Convince the other borrower to refinance the loan in occupier's name only.
      • Convince the lender to not take action against the non-occupying spouse. There is no reasonable situation where I would see a lender doing so, however.
      • File bankruptcy.
      • Die

      You almost certainly have a cause of action (a legal reason to file a lawsuit) against your ex-spouse. If, for example, your spouse was wealthy and was not paying to spite you, you could ask a court to liquidate your ex-spouse's assets to pay the debt. That seems an unlikely set of circumstances here. Filing a lawsuit here would not be a wise course of action because it would not change the circumstances for either of you if you win.

      What to do? You have limited options. Talk to a Texas lawyer who has experience in bankruptcy to learn more about the positives and negatives of this option.

      2 Votes